India is betting big on electric vehicles, but where does that leave the makers of hybrids?

Last Sunday was a decisive one for Toyota Kirloskar Motor. It was the day the GST Council met to review tax rates in a vast swathe of product categories. By the end of the meeting, rates on 66 products were brought down, including pickles, agarbattis and cashew nuts.

Hybrid cars — where Toyota’s India outpost is a pioneer of sorts with the Camry hybrid and with plans to launch many more such models — weren’t that lucky, and will attract a peak duty of 43% (28% GST plus 15% cess). Electric vehicles (EVs) will be taxed at 12% even as hybrids are bracketed along with luxury cars in the 43% tax stratosphere.

A (full) hybrid car can run just on battery power without using the traditional engine.“We feel a little let down. There is a lack of policy clarity. It is better to be technology agnostic, set broad emission guidelines and let the consumer decide,” says Vikram Kirloskar, vice-chairman, Toyota Kirloskar Motor. The high tariff throws a spanner into the plans for the Prius, the fourth generation of which was launched earlier this year for just under Rs 40 lakh. On the back of robust consumer demand, Toyota had shifted to producing only the hybrid variant with imported kits.

The government’s message is loud and clear — and in line with its stated goal of having an all-EV fleet on Indian roads by 2030. Toyota may be disappointed, but in the West Tesla founder Elon Musk may well be rubbing his hands in glee.

On Thursday, he tweeted — in reply to yet another question on Tesla’s India plans — that he was in discussions with the government for “temporary relief on import penalties/ restrictions until a local factory is built”. Clearly, Tesla, one of the global EV pioneers (the others include Renault and Nissan), is in a hurry to check local appetite for its EV products — which is why it is keen to first import and sell before taking the call to manufacture in India.

As eager as Musk would be Chetan Maini, who founded Reva Electric way back in 1994, before selling it to Mahindra & Mahindra in 2010. Maini is now finding his second wind with Sun Mobility, a company that will set up charging infrastructure for EVs. Incorporated two months ago, it will begin pilots early next year and is planning a national rollout by end-2018. Already in talks with a range of carmakers, Sun Mobility wants to evolve an open architecture charging solution that caters to all kinds of vehicles. “If we can take care of the range anxiety (the distance an EV can run on a single charge), figure ways to amortise high battery costs and make swapping batteries as fast as filling petrol, EVs have a great future,” says Maini.

These are exciting times for those on the EV wagon, and uncertain times for those a lap or two behind which would mean most of the local auto sector, including the $39 billion auto component industry. Some 10,000 entities have cumulatively invested over $14 billion, export components worth $11 billion and employ 30 lakh people (directly and indirectly). Almost 40% their revenue comes from engines and power trains, area that will get impacted the most with the new thrust on EVs. Battery-powered vehicles have very different engines and powertrains from the internal combustion engines used in petrol and diesel cars. “Changes should be evolutionary, not disruptive,” says Vinnie Mehta, director general, Auto Component Manufacturers Association.

Caution, Bumps Ahead Maruti Suzuki chairman RC Bhargava who in May told ET that the higher tax on hybrid was “probably inadvertent” is now more calibrated: “EVs are obviously the ideal solution but they have some distance to go before infrastructure and technology fall in place.” Maruti has been the largest seller of mild hybrids with two variants, Ciaz and Ertiga, notching up over 100,000 unit sales since their launch in 2015. New tax structure will affect it the most. A mild hybrid has a motor-assist that allows the engine to be turned off when the car is coasting.

Roland Folger, CEO of Mercedes-Benz India, reckons that the government should be encouraging both hybrids and EVs.

“Though we strongly believe electric is the future, it is important that we achieve a smooth and proper transition to BS VI.” India will jump from Bharat State (BS) IV emission norms to BS VI by 2020.

In its EV push, the government must consider a few critical issues. The biggest is the policy flipflop. Till recently, under FAME — Faster Adoption and Manufacturing of Hybrid and Electric Vehicles — the government was offering financial incentive to both hybrids and EVs. “Encouraged by this policy, companies made investments. Don’t pull the plug. Please don’t play with the industry,” says Jagdish Khattar, a former managing director of Maruti Suzuki.

Some experts feel that the EV technology is still evolving and has yet to be commercialised. “EVs require a strong charging infrastructure, operating range is still a developing parameter and battery costs are still high,” says Arun Malhotra, managing director, Nissan India. Nissan’s Leaf is the world’s best-selling EV and feasibility studies are under way for its India launch. Experts also warn of putting all eggs in one basket.

“Research on new technologies like fuel cells is on. At this stage to pick one technology and bet on it — I don’t fully understand it,” says Rakesh Batra, partner (automotive), Ernst & Young. The limited success of once-hailed CNG vehicles, which required separate refuelling infrastructure, must be kept in mind. Instead of pushing EVs to consumers, Kavan Mukhtyar, partner, PricewaterhouseCoopers, suggests that the government must target commercial fleets like buses and cab companies to solve the initial glitches.

Incremental vs Disruptive Even though the fifth largest, India is relatively a small car market at 3 million cars (China sold over 28 million in 2016) but with a sharp growth curve ahead. Even as car ownership is set to grow, vehicular pollution is rising. “Sometimes when you are trailing so far behind, it is better to jump solutions” says Maini.

Besides pollution, there is another problem with cars that run on petrol or diesel. India’s oil import bill has been rising, and is pegged at Rs 4.7 lakh crore in 2016-17, 3% of GDP. India imports 80% of its crude oil needs, making it hugely dependent on global supplies and far more vulnerable to global shocks.

It is also a question of at which stage India is entering market,” says Mahesh Babu, CEO, Mahindra Electric. With 400 employees, a pilot project in Nagpur with Ola and 2,000 EV sales in 2016-17, an upbeat Babu is readying new EV models for launch.

India is entering many sectors at a time when technology is offering it a chance to leapfrog and seek solutions. Consider the banking sector. With a large unbanked population, India is counting on a range of newage banking solutions —from e-wallets to pureplay e-banks — to bring low-cost banking to its citizens.

The Bet on Solar Energy India — where over 240 million people still don’t have electricity — is betting big on solar energy. So far, polluting thermal power provided 60% of India’s 330 GW installed generating capacity. The government wants to grow solar capacity from 57 GW in May 2017 to 175 GW by 2022. By 2027, the government hopes to have 40% of India’s energy needs met by renewables.

Considered commercially unviable barely a decade back, solar tariffs have tumbled today, making it an attractive alternative. The latest bid was at Rs 2.44 per kilowatt hour, a fifth of the price a decade ago.

Electrification of the automobile industry will take this solar bet to the next level. It will at once help India tackle its oil import bill, secure its energy needs and cut down vehicular pollution. EVs have zero tail pipe emission. “We may not have the final answer on EVs as the technology is still evolving. But the world is moving towards it. India is saying, ‘let me not go through the interim technologies (hybrid) and go straight to EVs’.

India is following in China’s footsteps. Since 2009, China has pushed EV adoption through subsidies and policy nudges and is today its biggest market. A report by Bloomberg New Energy Finance says that, since 2012, the Chinese government has introduced 20 different policy nudges to promote EVs. It provides upwards of $7,800 as subsidy for every EV purchased, has mandated EV quotas for carmakers, offers discounted battery charging rates for customers, exemption from parking charges, dedicated parking spots and demarcated lowemission driving zones. “China clearly does not want to miss the EV bus,” says Ashish Sethia, head of research (Asia-Pacific), Bloomberg New Energy Finance. This also helps China nurture its own firms like BYD Auto in an industry so dominated by the West and Japan.

The Battlefronts

While China’s audacious EV strategy may look good to emulate, the question is whether India will have the political and economic bandwidth to take such decisions. While China harbours ambitions to nurture its homegrown EV makers, India has few such firms, barring a fledgling Mahindra Electric that sold 2,000-odd cars last year. Now, you know why Musk is eagerly engaging with Indians on Twitter.